Monetary Policy, Expectations and Commitment

Evans, George W.; Honkapohja, Seppo

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Monetary Policy, Expectations and Commitment

42 Pages Posted: 17 Aug 2002

See all articles by George W. Evans

George W. Evans

University of Oregon - Department of Economics; University of St. Andrews - School of Economics and Finance

Seppo Honkapohja

Centre for Economic Policy Research (CEPR); Aalto University School of Business; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Aalto University - School of Business

There are 3 versions of this paper

Date Written: June 2002

Abstract

Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy. We assess these optimal reaction functions and instrument rules in terms of whether they lead to an RE equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private expectations performs well on both counts.

Keywords: Commitment, interest rate setting, adaptive learning, stability determinacy

JEL Classification: D84, E31, E52

Suggested Citation: Suggested Citation

Evans, George W. and Honkapohja, Seppo and Honkapohja, Seppo, Monetary Policy, Expectations and Commitment (June 2002). Available at SSRN: https://ssrn.com/abstract=323389